PE Ratio and Future Growth Example

PE Ratio and Future Growth Example

PE Ration provides useful information about the future growth or prospectus of the company, for example a company with high P/E ratio means, it has bright future prospectus, this concept can be explained by the following example

Example

Ali & Company reported an EPS for 2013 = .40

Fayaz & Company reported an EPS 2013 = .60

both companies quoted price for 2013 was 30

Calculate P/E ratio and comment?

Solution

P/E Ratio = Market Price/EPS

ALI & Co = 30/.4 =75

Fayaz & Co = 30/.6=50

Fayaz company has better p/e ratio, it means it has bright future aspect than Ali & company, this is the reason that despite lower earnings of Fayaz , it market price is equal to Ali & Co.